Centralisation Vs. Decentralisation: Differences And Benefits

By Indeed Editorial Team

Published 26 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Centralised and decentralised decision-making processes are two essential management approaches. Both these styles are prevalent in organisations and help leaders manage their teams. Learning about the differences between centralisation and decentralisation can help you manage your team effectively and ensure the timely completion of project deliverables. In this article, we define centralisation vs. decentralisation, explain their differences, discuss their pros and cons and share how to decide which approach to follow.

Definition of centralisation vs. decentralisation

Learning about the differences between centralisation vs. decentralisation can help you understand the importance of these decision-making and management styles in an organisation. Centralisation is a form of management and decision-making structure where the power of planning and decision-making remains with the top leadership. In a centralised organisation, the top management determines organisational goals and strategies. Once the upper management has set rules and policies, employees are bound to follow them.

Decentralisation is a structure where the leader delegates more responsibility to the members. In organisations, this means that the middle and lower-level management leaders get more autonomy to make decisions. In such organisations, employees have more freedom to make their own day-to-day decisions, while the top-level management generally focuses on long-term goals. This structure is generally more transparent and open, as it encourages employee participation.

Related: 10 Common Leadership Styles

Differences between centralisation vs. decentralisation

Here are some prominent differences between centralised and decentralised decision-making styles:

Power concentration

In a centralised structure, decision-making capabilities stay with the top management. There is a concentration of power and decision making at the top level. The top-level managers take all strategic decisions for the company. In a decentralised structure, the organisation delegates power across multiple levels, including middle and lower levels. A decentralised system is more open and horizontal, while a centralised structure is more vertical.

Organisation size

Centralised structures are ideal for small-sized organisations. This is because only a few people get involved in the decision-making process, which can reduce overhead and administrative costs. Decentralised structures are ideal for big organisations where middle and lower-level leaders can get more autonomy in managing their teams. More people get involved in decision-making in a decentralised structure.

Time

The decision-making speed can be slow in a centralised company. The top management decides and then informs the mid-level and senior management about the decision and how to implement it. This can result in employees waiting for instructions before performing any tasks. A decentralised firm involves multiple teams in the decision-making process, which allows the company to make most of its important decisions quickly.

Conversely, when the number of decision-makers in a decentralised structure is too high, it can take a long time to make decisions. It can be harder to reach a consensus when many people get involved. A centralised model can be more beneficial for companies that have fixed processes but only require a system to implement those.

Ideology and decision-making burden

In a centralised firm, those who make decisions usually share a common ideology. There are fewer chances of a conflict in decisions when taken by the top management. There may be higher chances of disputes in decision-making in decentralisation, as multiple stakeholders can take independent decisions. The decision-making burden in decentralisation is across multiple levels. In centralisation, only the top management carries the burden of decision making.

Authority and ownership

Traits like leadership and accountability are clearly visible in a centralised company. A centralised firm has a systematic and constant reservation of authority, and everyone understands who to consult for leadership. In decentralisation, there is sharing of responsibility at all levels in an organisation. There is a systematic dispersal of authority in decentralisation, making it challenging to fix ownership and authority.

Related: A Guide To 10 Effective Management Styles (With Examples)

Pros and cons of centralisation

Here are some advantages and disadvantages of centralisation:

Pros of centralisation

Centralisation offers the following benefits to an organisation:

  • Equality and fairness: Centralisation helps drive equality in the workplace, as the parameters for employee evaluation and success are consistent. This also ensures that work allocation for an employee is fair and that the responsibilities are equal and transparent.

  • Standardisation: There is a standardisation of tasks in an organisation with centralised decision-making. This makes it easier for employees to improve compliance, as they can follow a fixed process for everything.

  • Duplication: As a central authority manages everything, there is little to no scope for duplication of effort or activities. This is because the allocation of tasks is more efficient in centralised structures.

  • Leadership: In centralisation, there is a leader or a group of leaders in the organisation, and all employees can look towards them for direction. This gives employees a clear face associated with the company's or team's leadership.

Related: What Is Transactional Leadership?

Cons of centralisation

Here are some drawbacks of a centralised structure:

  • Lack of employee autonomy: In centralisation, employees do not have much authority. They work based on the framework as given by the top management.

  • Conformity: There can be strict conformity to norms in the organisation, which suppress creativity or innovation.

  • Rigidity: Small decisions or changes regarding day-to-day operations may require approval from the top management, which can foster rigidity.

  • Communication challenges: Centralisation can limit communication between different levels in an organisation. With too much control, employees may hesitate to communicate with the top management and may not be comfortable sharing ideas.

Related: What Is Decision Making? Definition, Types And Tips

Pros and cons of decentralisation

Here are some benefits and drawbacks of decentralisation:

Pros of decentralisation

Decentralisation provides the following advantages for organisations:

  • Sustainability: As decentralised organisations distribute the decision-making power to multiple teams, the top leadership can work on a company's long-term vision.

  • Motivation: Managers and employees can be more motivated in a decentralised structure, as they can exercise autonomy and creativity.

  • Flexibility: A decentralised organisation has less rigidity, as managers are more open to exchanging ideas. This flexibility allows for greater collaboration and innovation.

  • Leadership development: Decentralisation can help train employees to become leaders and help develop employees' potential by giving them more responsibilities. This can help the organisation cultivate talented and effective leaders for the future.

Related: What Is Management? Definition, Functions And Levels

Cons of decentralisation

Decentralisation usually comes with the following challenges:

  • Size: Decentralisation is not ideal for new companies or start-ups, as employees in such organisations typically require strong leadership to grow. In such companies, top management cannot let inexperienced or new employees make crucial decisions.

  • Workplace conflict: Decentralised structures can result in intense competition, as middle managers and employees may try to continually outperform their peers. A high degree of autonomy and decision-making independence can also make interdepartmental collaboration challenging.

  • Duplication of effort: Decentralisation can lead to duplication of activities and processes, resulting in additional costs for organisations. This is typically due to a lack of coordination between different teams or employees.

  • Inconsistency: Different rules and regulations in an organisation may be perceived differently by employees and managers, and it can make implementing uniform and consistent policies difficult.

How to choose between centralisation and decentralisation

Follow these steps to determine which management style is most suitable for your team or project:

  1. Consider project deadlines. Determine the nature and urgency of most of your projects. Projects with flexible deadlines can benefit from decentralised decision-making as it may increase the diversity of opinion, whereas projects that have strict or urgent deadlines may be more suitable for centralised decision-making.

  2. Identify the number of decision-makers. If there are too many decision-makers in the team, a centralised decision-making style involving one or a few key team members may increase efficiency.

  3. Calculate the time to make decisions. If the time to make crucial decisions in resulting a delay in the project's progress, it might be a better idea to centralise decisions.

  4. Establish flexibility. If there is scope for innovation, creativity and flexibility in existing processes, a decentralised decision-making process may be more beneficial. For instance, a project aiming to survey the market, conduct research and gather insights can benefit from such an approach compared to a project with a set number of deliverables or items.

  5. Understand compliance issues. When it comes to ensuring high compliance rates or quality, centralised decision-making can be more effective.

  6. Consult with senior leaders. When deciding between the two approaches, talk to other leaders and managers in the organisation to discuss the established norm. Some organisations may prefer one style over the other or have set processes on how to manage teams.

  7. Try to balance the two. Excessively using both decision-making styles may not be the most efficient way to manage the team. Try to balance both approaches depending on different projects, deliverables, processes and scope.

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